The growth of alternative finance and fintech companies has been explosive over the last five years. Since the credit crunch caused a tightening of credit availability, particularly for small businesses and entrepreneurs, hundreds of lenders raced to fill the gap with innovative loan solutions. Borro’s unique approach was to lend against valuable assets such as cars, artwork and watches and this was one of many new ways to borrow that came to the market at the start of the decade.
Crowdfunding, peer-to-peer lending, community credit unions all contributed to this growing sector. Between 2012 and 2014 equity crowdfunding grew 410%, P2P Business lending grew 250% and P2P consumer lending 108% in the UK alone. Across Europe the entire sector was worth an estimated €2.9billion in 2014, with the UK leading the way. This also includes reward-based funders like Kickstarter, where backers are rewarded with a product or service and donation crowdfunders like GoFundMe.
A recent article in the Telegraph said that the success alternative finance was indicative of the UK’s economic recovery and could potentially contribute to a future rise in interest rates.
“…the emergence of alternative lending platforms such as CrowdCube, Seedrs, and Ratesetter have helped to alleviate the so-called “funding gap” faced by smaller businesses, where creditworthy SMEs have been unable to obtain long-term finance.” – Telegraph
Alternative finance also lacks the baggage that comes with big banking – it can be more flexible, more responsive and more technologically innovative catering to customers who demand better service and more choice in a digital world.
Future Alternative Finance Growth
Looking to the future it’s possible to identify roadblocks for alternative finance, but at the same time to recognise fantastic opportunities for even greater growth. A 2014 report by Nesta did a comprehensive overview of the Alt-Finance market, including a survey on customer awareness in the UK. They found less than half of the people surveyed were aware of alternative finance sources.
Forty–two per cent of individuals participating in a national survey were completely unaware of any type of alternative financing activities or platforms. Even more promising for the growth potential of the market is that just 14 per cent of the respondents in the same survey had used an alternative finance platform, leaving significant scope for expansion.
This can be attributed to how nascent the sector and is and the fact that alternative finance companies lack the high-street name recognition of big financial brands. It also indicates just how big potential growth is in the next few years as the concept of alternative finance becomes more familiar to both lenders and borrowers.
Similarly among SMEs there was a lack of awareness of alternative finance providers, potentially as they have established borrowing practices that have yet to be disrupted. The report also says respondents felt that although alternative finance companies were more flexible and risk-taking than traditional firms, they also lacked knowledge of the SME’s particular industry. An issue that can also be solved as the industry matures.
External Influence on Alternative Finance Growth
It has not gone unnoticed by the big banks and established finance providers that the impact and growth of alternative finance has been so huge. As well as the financial opportunities the sector provides there is also the sense that alternative finance is cutting-edge, exciting and innovative – all qualities big business wants to tap into to appeal to young, tech-savvy customers.
RainFin, a South African peer-to-peer lender sold a 49% stake to Barclays in 2014 and has doubled the value of its loans in the last year. Santander and Royal Bank of Scotland have both partnered with Funding Circle to refer small business owners who do not qualify for loans with the traditional banks. As banks look to encroach more into alternative finance there’s potentially opportunities for partnerships, but also for big banks to swallow up these innovative lending techniques.
The regulatory landscape is still fairly uneven internationally when it comes to alternative finance and inevitably over time one would expect a more global approach. It’s often the case that regulations can restrict growth in new markets, but greater regulation may actually help build confidence in alternative finance in the long run.
Alternative Finance Growth
The future for alternative finance looks very encouraging, building on the success so far could easily be achieved by growing awareness and trust among the general public. Strategic opportunities to work together with other lenders and embrace new frameworks should also help establish the alternative finance sector further. As time goes on the opportunity will emerge to demonstrate through case studies and success stories that alternative finance can have a positive long term impact on businesses and individuals.